OppenheimerFunds Sees Some Funds Shrink 33% on Puerto Rico Bonds

Aug. 5 (Bloomberg) -- OppenheimerFunds Inc., the largest
holder of Puerto Rico debt among mutual funds, has seen some of
its funds lose almost a third of their assets in the past year,
data compiled by Bloomberg show.

Investors are pulling cash from the New York-based
company’s funds as bondholders speculate Puerto Rico will be
unable to repay all of its $73 billion of commonwealth and
agency debt. Prices on Puerto Rico bonds set record lows in July
after legislators passed a law that would enable certain public
corporations, including the Electric Power Authority, to ask
investors to take a loss.

Among OppenheimerFunds funds that hold Puerto Rico bonds,
two have contracted by almost 33 percent in the past year,
according to Bloomberg data. Two others have shrunk by about 29
percent.

“The level of Puerto Rico risk has increased, so investors
may perceive more risk in the fund,” said Tom Doe, chief
executive officer of Concord, Massachusetts-based Municipal
Market Advisors.

Debt sold by junk-rated Puerto Rico, which has struggled to
boost its economy since 2006, has been trading at distressed
levels in the past year. The bonds of the self-governing
commonwealth of 3.6 million are tax-free nationwide, leading 66
percent of U.S. mutual funds to hold them, according to
Morningstar Inc.

Hedge Funds

As traditional municipal-bond investors have shied away
from the island, hedge funds and buyers of riskier debt have
stepped in. Such investors bought most of Puerto Rico’s $3.5
billion general-obligation sale in March, the biggest
speculative-grade muni sale ever.

OppenheimerFunds held $5.15 billion of Puerto Rico
securities as of May 29, or about 19 percent of its muni assets,
across 20 mutual funds, according to Morningstar. That was more
than any U.S. mutual fund, according to the firm.

“Despite recent volatility and price declines, we have
observed significant market activity for Puerto Rico’s municipal
bonds, with strong liquidity in both large block and retail
trading,” OppenheimerFunds wrote in a July 19 commentary on its
website. “Puerto Rico’s bonds are currently underpriced by the
municipal bond market.”

Kaitlyn Downing, a spokeswoman for OppenheimerFunds,
declined to comment on the asset declines.

Maryland Fund

The Oppenheimer Rochester Maryland Municipal Fund directed
about 35 percent of holdings to Puerto Rico as of June 30,
according to the company’s website. Its assets fell to $64.9
million as of Aug. 4, down from $96.1 million a year ago,
Bloomberg data show.

The fund has earned about 7 percent this year, beating 71
percent of peers.

The Oppenheimer Rochester Limited Term Municipal Fund
allocated 17 percent of holdings to Puerto Rico as of June 30.
Its assets fell to $3.45 billion as of Aug. 4, from $5.1 billion
a year ago. It’s earned 3.8 percent this year, better than 39
percent of comparable funds.

The electric agency, called Prepa, has extended $671
million of bank loans to Aug. 14. It tapped $41.6 million of
reserves to make a $417.6 million bond payment July 1.

Prepa, with $8.6 billion of debt, may be the first public
corporation to use the debt-restructuring law that lawmakers
passed in June. OppenheimerFunds and San Mateo, California-based
Franklin Resources Inc. have filed suit seeking to overturn the
law, saying it’s unconstitutional.

Oppenheimer holds $821.4 million of Prepa debt. Franklin
has $907.2 million, according to court documents.

The $3.68 billion Oppenheimer Rochester Limited Term New
York Municipal Fund, which directs 20 percent to Puerto Rico,
and the $86.6 million Oppenheimer Rochester North Carolina
Municipal Fund, which allocates about 20 percent, each lost
about 29 percent of assets in the past year.

Oppenheimer investors are aware of the allocation to Puerto
Rico and the associated volatility, Doe said.